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Tuesday, February 7, 2012

M&A Mania Smelts The Iron Ore Industry

Tue,February7, 2012

Last Thursday, Swiss miner Xstrata and commodities trader Glencore announced a potential blockbuster merger that would shake up a few of mining’s biggest industries.

According to Reuters, the deal is set to total $80 billion. And the newly combined firms “would rank as the world’s largest thermal coal exporter, the largest zinc producer and third-largest copper miner…”

Many analysts are already predicting a jump in the price of coal, copper and zinc in the coming weeks.

But the all-share merger would also disrupt another big mining industry… iron ore. And investors will want to pay close attention.
Iron Ore Equals Big Profits

Over the past 10 years, iron ore has had a run even gold can’t touch.

From August 2001 to August 2011, prices jumped 1,266%. Gold jumped 566% comparably.

Today, about 70% of iron ore traded in the world is accounted for by three companies – BHP Billiton, Vale and Rio Tinto. And they’re raking in massive profits.

Reuters reports, “Iron ore sells for around $140 per tonne to China… and only costs about $20 to $30 per tonne to mine.” China’s steelmakers aren’t very happy about paying such high prices. But since October 2011, they’ve had a little bit of a reprieve.

The “big three” have flooded the market with iron ore supplies, driving the price lower, to around $120.

As explains, the iron ore’s big players are “concentrating on building market share rather than maximizing prices. This way the giants drive high-cost producers out of the business.”

If Glencore and Xstrata don’t want to get left out in the rain, they should make this merger happen.

And there are two main reasons it’s more likely to happen than not.
Glencore and Xstrata Make Sense

First, Glencore already owns 34% of Xstrata. So both companies already understand the risks and advantages this merger carries. And it should make it that much easier for them to agree on a final price.

Second, Xstrata has been trying to gain a stake in the iron ore industry for years. In 2009, the company attempted to purchase Anglo American (AAUKF.PK). The deal would have made Xstrata the fifth-most-profitable company in the iron ore market. But talks fizzled and the deal fell through.

Now the proposed merger between Glencore and Xstrata has reignited speculation of another takeover attempt coming for Anglo American, the world’s fourth-largest iron ore producer.

A few other companies also stand to be bought up if a deal is reached, as well.
Iron Ore M&A Heating Up

First Quantum Minerals (FQVLF.PK), Fortescue Metals Group (PINK: FSUMF.PK) and Freeport McMoRan Copper & Gold (NYSE: FCX) are also being seen as potential targets.

But Freeport may also be too expensive for Xstrata and Glencore and could end up as more of a competitor than potential takeover.

Only time will tell. But this is one development that should begin unfolding in just the next few weeks.

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